The move from Viridian and CFS to provide personal advice in a scaled manner highlights a growing willingness within the industry to fix its own problems in lieu of waiting for the government.
Private markets are worth around $14 trillion globally, ASIC believes. It’s not sure, and that uncertainty hints at the wider problem – private markets, and their effect on public ones, is still largely a mystery.
China relationship brings new volatility dynamic to Australian portfolio management
For financial advisers, licensees and wholesale investment teams, recent ructions in China highlighted the difficulty in navigating critical geopolitical issues in terms of their potential impact on their clients’ portfolios.
Prime Minister Anthony Albanese’s recent trip to China was widely interpreted as a harbinger of improved relations between the two countries. When coupled with increased ministerial engagements over the past year, it seemed the troubled waters of recent years – highlighted by trade bans on agricultural commodities and coal – were calming.
Yet within weeks the relationship was on red alert after a fresh bout of accusations between the two nations over a naval incident in international waters in the South China Sea. Canberra said sonar pulses emitted by a Chinese warship injured a Navy diver and Beijing responded by urging Australia not to make “reckless and irresponsible accusations”. It then lodged an official complaint to Canberra.
Certainly, the importance of the economic relationship between Australia and China cannot be overstated. China is our largest trading partner, accounting for around a third of our exports and a fifth of our imports. In dollar terms, Australian exports to China totalled $US102 billion and imports $84 billion in 2022, according to UN Comtrade data. Significantly, these imports exclude Chinese goods that come to Australia via other countries, with Apple iPhones being a prime example.
So, any threat to the trading relationship is going to have serious economic ramifications, notwithstanding the efforts made by exporters to diversify their markets in the wake of China’s recent trade bans and a perceived need for greater economic self-sufficiency due to COVID.
Adding to the complexity of the investment equation is the fact China’s economy is struggling. From the late 1970s, when former paramount leader Deng Xiaoping instituted a series of bold economic reforms, the world grew accustomed to China enjoying strong economic growth as it lifted many of its 1.4 billion citizens out of poverty. But no longer.
China’s tough COVID restrictions slowed the economy to a snail’s pace. But when restrictions were lifted early this year, most analysts believed pent-up consumer demand would underpin an economic rebound. It hasn’t eventuated. Key economic indicators are pointing south, whether they be consumer, manufacturing, or investment. The investment houses Nomura, Morgan Stanley, and Barclays, have all trimmed their forecasts. The Renminbi is trading at historic lows against the US dollar while unemployment is rising, especially among the youth.
Overhanging a sagging economy is a property crisis. A recent RBA report highlighted the vulnerabilities in China’s financial system due to the “sharp deterioration” in a property sector accounting for about 30 per cent of GDP. With major property developers on the brink of collapse, there is ongoing market speculation that their downfall could have a contagion effect across the economy.
Geopolitical tensions. A weak economy. An authoritative leader, President Xi Jinping, the likes of whose grip on power has not been seen since Mao Zedong. Little wonder investors are shying off investing directly in China or are wary of companies whose earnings are China-related.
There are still analysts seeing the China story as a glass half full. Wenchang Ma, the Hong Kong-based portfolio manager at the $US158 billion active global asset manager Ninety One, paints a bullish long-term view of China based on a rising middle class driving consumption growth, technological self-sufficiency, transition to renewable energy, state-owned enterprise reform and continuing integration with the global economy.
The $6.3 billion global asset manager Foord argues that the fact China has opted for short-term financial pain and has resisted the temptation to pump prime the economy (as it did after the GFC) should be embraced by investors looking to the long term.
Portfolio Manager Jing Cong Xue says China is playing the long game of economic reform to allow new economic sectors such as renewable energy, EVs, e-commerce, gaming, online travel agencies and cloud computing to emerge. A China adopting this economic path and eschewing loose monetary policy, property, and state-driven investment could then take the leap from a mid-level economy to a modern, productive economy.
There is no definitive answer; getting the investment settings right in an open economy is hard enough. What more a one-party state where decision-making is opaque and the rule of law questionable. But the world’s second largest economy, especially one so critical to Australia’s economic well-being, cannot be ignored.
The portfolio management game just got that much harder.
